Holy Grail: A Single Purchasing Interface

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Buying across electronic networks isn't new. Hundreds of companies have used them for decades, automating the process of ordering production goods by trading EDI messages with suppliers.

But now the Web is starting to impact nonproduction purchases, or so-called MRO (maintenance, repair and operations) goods.

MRO, or indirect purchasing, has historically been less automated than procurement for direct goods, or those items used to build finished products. Yet MRO is a hugely important half of the procurement puzzle, representing thousands of goods ranging from office paper and pencils to floor polish and PCs.

To begin with, online MRO catalogs are replacing printed catalogs stacked on the procurement manager's desk. On the Web, they are customized to reflect negotiated discounts. But they can go further by distributing access to each employee, a self-service model that offloads labor from the centralized procurement department.

Business applications, such as enterprise resource planning software, also are being linked to Web procurement systems, synchronizing what companies need to buy with what potential suppliers have to sell. This, analysts say, will blur the distinction between "direct" and "indirect" procurement.

Unquestionably, the initial benefit of Web-based MRO buying is streamlining what has been a largely manual process.

"We get a lot of phone calls and faxes," says Deb Kunkler, procurement manager at Idaho Power Co., which spends about $25 million a year on MRO. The utility is piloting a system from Commerce One that lets employees access online catalogs from its office-supply and janitorial product vendors. Commerce One offers a combination of intranet e-procurement applications (BuySite) and an associated online marketplace (MarketSite) where buyers and sellers are connected.

By March, Kunkler expects to reach about eight of its MRO vendors this way. Ultimately, she hopes to save as much as $500,000 annually through more favorable pricing and reduced overhead.

She hopes this approach will reduce so-called "maverick" buying, the bane of MRO procurement officers everywhere. The term refers to departments or individuals who acquire goods or services independently, without the benefit of the negotiated company discounts.

And Kunkler expects that by driving a higher volume of MRO traffic through the Web funnel--and thereby forcing employees to buy only from "approved" suppliers--she'll be able to more effectively negotiate price breaks.

That is the same hope of Charles Schwab & Co., which in September said it would replace a semi-automated system that includes printing purchase orders from the financial service firm's ERP system and faxing them to suppliers.

"We expect to increase our buying power by capturing a greater percentage of the company's spending," says Beverly Mackey, vice president of procurement at Schwab, which plans to run most of its operating procurement through Ariba Inc. by the end of 2001.

The impact of Internet purchasing isn't lost on users. In InternetWeek's 1999 Transformation of the Enterprise survey of 1,000 business and IT managers, 36 percent say the Internet is changing the procurement department, though procurement scored below engineering, marketing, customer service, finance, sales and research.

For Barr & Barr Inc., a 72-year-old contract construction firm, the benefit will be an efficient electronic marketplace where all parties can keep tabs on buying activity.

The company is investigating PrimeContract.com, a new business-to-business site that connects contractors with subcontractors.

"In construction, the bid time typically involves faxes and phones, and it can be a real horror show," says Stephen Killian, a project manager at Barr & Barr, who thinks the PrimeContract.com marketplace will shave up to 15 percent off the time it takes to issue a request for proposal and to process bids.

"Everyone will be working off the same page," Killian says. "Everyone sees the same work specifications and addenda." Once subcontractors have been selected for a job, requests for materials will be posted in the same application.

PrimeContract.com was launched in September by Primavera Systems Inc., a developer of project management software for engineering and construction firms, along with e-procurement software company PurchasePro.com Inc. The two want to bring a trading hub to the $652 billion U.S. construction market.

Vertical-market hubs like this one are showing up everywhere, from metals to chemicals to trucking.

One of the newest will be launched early next year by Distribution Market Advantage Inc., a marketing company owned and operated by a consortium of 16 large regional food wholesalers with 52 warehouses around the country.

DMA's online order entry and inventory management system will be used by local restaurants to order supplies from DMA members. Each buyer will see different prices and inventory, reflecting the master purchasing agreements between DMA members and restaurant chains.

When orders are placed through the DMA site, "We can drive management reports, which will be available to the restaurant chains," says Robert Sala, CEO of the DMA, which will test the food hub through the fall before its commercial release next year. "The chain will be able to come into the site and see how many cases of ketchup moved across the 52 warehouses to all its restaurants."

Well over 300 ventures now offer vertical market trading hubs, according to Volpe Brown Whelan & Co., an investment bank that tracks the phenomenon and expects as many as 1,000 hubs by 2002. Some focus on direct goods, others on MRO.

Aside from efficiency, some e-procurement users say they favor these systems because they can gain access to a larger number of suppliers.

"Our old vendor list was 1,300 to 1,400 suppliers. Now I have 4,000, and the list keeps growing," says Dennis Macready, director of purchasing at the Mirage casino and hotel, a PurchasePro.com customer for more than two years.

The Mirage used to send out RFPs to four companies every six or 12 months, he says. With the electronic marketplace, it's able to send out bids that reach 20 or 30 suppliers. Best of all, the software automatically collects the responses and formats them into spreadsheets. "What used to take five people and two weeks now takes an hour-long meeting," Macready says.

But some analysts think MRO e-procurement will follow the path of EDI networks for direct goods, causing a consolidation--not an expansion--in the number of vendors companies interact with.

"The same processes will go on," predicts Pierre Mitchell, a senior analyst at AMR Research, who expects companies using e-procurement hubs will gravitate toward reduced product complexity and smaller supplier lists.

Rather than simply hunting for the best price, companies will work more closely with vendors, which will adapt their products to the needs of customers.

Mitchell also thinks the line between direct and indirect procurement, at the application level, will blur.

"I think you'll see applications combining direct and indirect purchasing tasks," he says, arguing that users will not want separate enterprise applications for different purchasing activities.

No wonder ERP vendors such as SAP and Oracle--which already provide direct procurement modules for many customers--are getting into MRO with Web applications and marketplaces to compete with Internet-centric start-ups like Commerce One and Ariba.

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Rush Presbyterian, a 700-bed hospital in Chicago, hopes to leverage a direct procurement infrastructure for MRO.

The hospital currently uses an ATM-like vending machine from OmniCell Technologies Inc., which connects to a Commerce One procurement system that seeks out the best prices for replenishment, based on the hospital's business rules.

"We'll be able to send up a request for quotes for all those things not under a [supplier] contract--all those high-volume, low-dollar things," says John Webb, director of materials management. He's already a fan of the system for replenishing direct goods because, he says, it eliminates the errors associated with manual systems.

Webb, who believes he'll consolidate the number of vendors the hospital works with, also plans to link his financial planning system with OmniCell's system. "All I'll be responsible for is one interface," he says.

Indeed, sophisticated links between Web purchasing and legacy inventory or plant maintenance systems seem inevitable. For one thing, the major ERP vendors all have introduced procurement modules tied to Web marketplaces.

Both traditional and Web-centric procurement vendors are moving forward as well.

The Mirage, for instance, will shortly install an interface between it's existing Stratton Warren procurement/inventory system and PurchasePro.com's electronic procurement marketplace.

Says Macready, the purchasing director: "This is where we want to end up, so that a change in our inventory will trigger a search for replenishment."

With that level of automation, it's no wonder that the Internet is catching on as an alternative to EDI purchasing systems.

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